VIEWS: 10 PAGES: 22 POSTED ON: 8/27/2011
managing sustainable global supply chains Framework and Best Practices Prepared by Dr. Stephen Brammer Dr. Stefan Hoejmose Dr. Andrew Millington nbs.net and NBS Supply chain disruptions can be devastating for operations and share price. Managing Sustainable Global Supply chains 2 How can companies manage their global supply chains to leverage opportunities and mitigate risk? Managing Sustainable Global Supply chains 3 the need for responsible and responsive supply chains Globalization has profoundly affected how At the same time, new risks and challenges companies are managed strategically and have emerged from these new, global supply operationally. chains. The risks range from inconsistent or poor quality to supply disruptions. Add One key outcome: the production of to these risks the layer of cultural, legal, many goods has shifted to developing and administrative, linguistic and political issues transitional economies, resulting in lower arising from cross-boundary networks. cost of production. China has become the ‘workshop of the world,’ offering a large Finally, consider the environmental issues workforce and low overhead costs that such as waste and emissions reduction, enable companies to produce high volumes recycling, product design, and recovery of products. and the social issues such as child labour, working conditions, bribery and corruption. There is seemingly no end to the complexity. Globalization + public concern about social and environmental issues = increased complexity in managing supply chains Managing Sustainable Global Supply Chains 4 While at one time addressing these social and STAKEHOLDERS WANT SUSTAINABLE environmental issues might have just been ‘nice to SUPPLY CHAINS do,’ that is no longer the case. Companies that fail to manage such issues expose themselves to both 28% Consumers operational and reputational risk. For example: 22% Government • Nike was publicly accused of using child labour in offshore factories in 1996. This 18% General Public criticism endured until 1998 when Nike’s 16% Activists CEO announced significant, long-term measures to improve working conditions 8% Media at supplier factories. 4% Industry Peers • Mattel was forced to recall US$100 million worth of product when one supplier used 3% Employees & Others lead-contaminated paint on the company’s toys 3% Investors FIRM in 2007. The company watched its stock price fall 18% in the months that followed and has since been the target of litigation. This figure shows the sources of pressure on firms to address social and environmental issues • Apple faced renewed criticism in 2011 for both in their global supply chains. The percentages possible environmental indiscretions and a lack indicate the frequency with which each pressure was cited in the research. of transparency in its supply chain. Apple had previously admitted that in 2008 half of its suppliers’ factories for key products including iPhones and iPads weren’t paying valid overtime, one quarter weren’t paying workers minimum wage, and one quarter failed to meet environmental standards. Time will tell if such issues will permanently tarnish Apple’s ‘clean’ image. Managing Sustainable Global Supply Chains 5 Designed for How can your company build a global supply The Network for Business Sustainability executives and chain that is competitive while sustainable? commissioned a systematic review of the Responsive while responsible? By applying body of research on sustainable global supply senior supply this research to your supply chain, you can chains. Synthesizing data from 194 studies chain, purchasing equip your company to respond to consumer spanning 25 years of research, this review and sustainability demands, survive global shocks, be more presents the most comprehensive and credible managers, this flexible, avoid supply disruptions, mitigate evidence to date on developing sustainable report presents reputational risk, avoid regulatory barriers, supply chains. The frameworks presented in and fend off global competition. the report were developed inductively from frameworks the existing anecdotal and empirical evidence. for developing The full-length systematic review is available competitive and WHAT ARE THE KEY ISSUES IN INTERNATIONAL SUPPLY CHAIN at nbs.net/knowledge/supply-chains. sustainable global SUSTAINABILITY? supply chains WHAT IS ‘MANAGING FOR SUPPLY CHAIN SUSTAINABILITY’? We adapt an existing definition describing ‘managing for supply chain sustainability’ as incorporating a company’s social, environmental and economic goals 0 10 20 30 40 50 60 70 80 90 1 into the coordination of inter-business processes to Working Conditions improve the long-term economic performance of the “Environmental” or “Green” Issues CSR (Corporate Social Responsibility) individual company and its supply chains.1 Low Wages/Minimum Wages Human Rights Child Labour Sustainability Health and Safety Forced/Bonded Labour Sweatshops Ethics Bribery Recycling Waste Air Pollution/Emissions Water Pollution/Emissions Working Hours This figure shows the key sustainability issues in supply chains. The frequency 1 Adapted from Carter, C. R., and Rogers, D. S. 2008. A framework of sustainable represents the number of sources (of 194) supply chain management: Moving toward new theory. International Journal of that dealt with each issue. Physical Distribution & Logistics Management, 38(5): 360–387. Managing Sustainable Global Supply Chains 6 developing sustainable global supply chains: three steps To develop new supply chains or improve existing ones, executives must think at a number of levels. First, consider the big picture: what is motivating change in your business? What are the opportunities and risks? Once your motivations are clear, identify the levers that will increase your odds of success. Finally, put in place practices that will help you realize your desired outcomes. Step 1 Step 2 Step 3 IDENTIFY ASSESS IMPROVE MOTIVATORS LEVERS PRACTICES Why should you What levers will How can you put care? What do you increase your chances it into practice? stand to gain of success? and lose? The frameworks presented in the following pages will help you think through each of these steps. Managing Sustainable Global Supply Chains 7 Identify Motivators: The 5C’s Framework of Motivation There are many reasons to address social and environmental issues in your supply chain. Understanding these issues will enable you to set goals and prioritize practices. The chart below lists the reasons cited by research, which align with five key areas: 1. Customers: access, attraction, retention, reputation, brand 2. Compliance: regulation, social pressure 3. Costs: efficiency, productivity, risk management 4. Competitive Advantage 5. Conscience: moral obligation, values 3% 7% CUSTOMERS 1% attraction 3% 26% retention reputation brand access COMPLIANCE 14% regulation social pressure COSTS risk management 2% efficiency productivity COMPETITIVE ADVANTAGE 19% 14% CONSCIENCE moral obligation 1% 2% or values 8% Managing Sustainable Global Supply Chains 8 Assess Levers: The 7P’s Framework of Levers Seven key levers can facilitate or inhibit your efforts to build a sustainable supply chain. Evaluate these levers to determine if you have influence over them and how to work with them. Examples of each are given below (the italicized examples appear most often in the literature). INTERNAL LEVERS B LIC POLICY PE Purpose: alignment of sustainability with PU ER S S organizational strategy, history of CSR in R the organization NE Policy: clear policy statements/codes of conduct, PO T PAR widely communicated policies, W financial resources, training and workshops, ER incentives, transparent and measured outcomes Purpose urpose Purpose People: leadership/management support, Policy oli ic i Policy supportive organizational culture, change agents, staff with strong personal commitments People eople People and capabilities EXTERNAL LEVERS Peers: industry collaboration Partners: trust in supplier engagement, dialogue with suppliers, long-term relationships with suppliers, third-party certification, shared vision with suppliers, experience sharing with suppliers, investment in suppliers, incentives in supply relationships, collaboration with suppliers Public policy: supportive regulation Power: organizational size, power over suppliers Managing Sustainable Global Supply Chains 9 Improve Practices: Baseline Practices Framework for Sustainable Supply Chains The following figure shows the four most prevalent practices in the literature for building sustainable supply chains: 1) Establishing a Code of Conduct; 2) Obtaining Third-Party Certifications; 3) Selecting Suppliers; 4) Monitoring Suppliers*. We consider these the ‘baseline’ practices that all organizations should embrace. These practices reflect a ‘command and control’ approach to supply chain management, in which the lead buying company dictates most rules and processes. GIVEN THE COMPLEXITIES OF THE GLOBAL BUSINESS ENVIRONMENT, THE ‘BASELINE’ MODEL EXHIBITS SOME SHORTCOMINGS: • Un-negotiated expectations lack 1 Code of Conduct Code of Conduct EXPECT T Certification Certification 2 Sets expectations of Sets expectations of legitimacy with local stakeholders required conduct Commonly used as Commonly usedas aa required conduct screening device in throughout the screening device in • Codes of conduct are relatively static throughout the supplier selection & supply chain supply chain supplier selection development and unresponsive to new issues or & development changes in stakeholder expectation • Third-party certification (e.g. SA8000 or T S E LE C T JECT ISO14001) imposes substantial costs REJECT on suppliers • Monitoring and auditing undermine trust and commitment in buyer-supplier relationships • Intensive monitoring can promote unethical practices such as suppliers hiding issues Monitoring/ Monitoring/ Selection Auditing Auditing Is the primary from supply chain partners Ensures Ensures Selection process for reducing • Lack of contract security undermines compliance compliance Is the primary supply risks with expections with expections process for reducing suppliers’ willingness to invest in more supply risks sustainable practices SPECT IN S P E C T 4 3 • Suppliers may lack resources to implement new approaches, and competing pressures (e.g. for timely deliveries) undermine the conditions needed for compliance *Note that different organizations may implement the practices in a different order. For instance, third-party certification may be requested/sought concurrently with selection, prior to selection, or after selection, in response to different needs. Managing Sustainable Global Supply Chains 10 Improve Practices: Best Practices Framework for Sustainable Supply Chains This framework addresses the shortcomings of the baseline model on the previous page by incorporating consultation, development and learning. Depending on your company’s power, relationships, resources and needs, you may be in a position to pursue the ‘next level’ of practices. The following page explains each step and provides anecdotes of how companies have exemplified these practices. CONF NS I RM TIO SU CTA PP PE 1 2 LIE EX RS L & FU G AG IN Measurement, RE AN Code of Certification & E ME Conduct Development UP E of KPIs ON AT CRE TAR Environmental Scanning Supplier GETS Selection Supplier Development NCE Data Capture, MA Supplier EV Evaluation & OR Learning AL Auditing RF Monitoring UA PE 4 3 TE N AN AI D H IM C PR Y OV P PL E E SU S UR MEA Managing Sustainable Global Supply Chains 11 Building a Sustainable Supply Chain Involves Four Steps: 1. Create Meaningful Expectations Enhance your capacity to anticipate new Engage with widely drawn stakeholder challenges and issues as they arise in the context groups to encourage their participation in of international supply chains through robust the development of a code of conduct or other environmental scanning. documents to enhance the applicability, legitimacy and efficacy of policies. For efficiency and to Put it into practice: avoid audit fatigue, it may be possible to find • Organize expert workshops on key a pre-existing standard the company can join. issues with academics, NGOs, etc. • Scan media reports on various industries Put it into practice: and geographical contexts to understand • Interact frequently with suppliers, emerging issues involving on-site dialogue or inviting • Communicate with on-site managers suppliers to buyers’ headquarters/plants to raise issues • Explicitly acknowledge cultural issues and challenges within supplier dialogue • Use multiple communication channels, e.g. websites, printed documents and training Mountain Equipment Co-Op (MEC), an outdoor gear retailer, uses their Supplier Code as the standard all vendors must adhere to. All suppliers are briefed on the standards and their obligation to meet them. Afterward, they must sign a Vendor Agreement formalizing their commitment. In return for their dedication, MEC works with factories to improve practices instead of walking away. Factories in turn must be willing to improve, and demonstrate positive results. Source: Mountain Equipment Co-Op website. http://www.mec.ca/Main/content_text.jsp?FOLDER%3C%3Efolder_id=2534374302883571 Managing Sustainable Global Supply Chains 12 2. Select Suppliers and Agree to Targets Rely less on immutable ‘tick box’ criteria Put it into practice: and focus more on supplier consultation • Hold awareness seminars with suppliers and development. Consider accepting to explore and raise issues and to open suppliers with poor current sustainability a space for supplier-led solutions performance if they are committed to • Develop detailed sets of key performance embarking on systematic, collaborative indicators (KPIs) with suppliers improvement processes. • Benchmark KPIs across suppliers and industry peers to ensure criteria stand up to external scrutiny • Define clear systems and processes through which reliable performance data are to be obtained The Coca-Cola Company invited top global suppliers to discuss the need to embed sustainability in their operations. Rather than set top-down directives, the company sought suppliers’ input to ensure long-term mutual success. Following the summit, Coca-Cola received nearly 200 proposals from suppliers, including ideas and strategies related to sustainable packaging, logistics, sustainable agriculture, water stewardship and portfolio innovation. Source: UN Global Compact, The Coca-Cola Company: Supplier Sustainability Summit, http://supply-chain.unglobalcompact.org/site/article/70 Managing Sustainable Global Supply Chains 13 3. Evaluate and Develop Suppliers Inform suppliers as to whether expectations Where performance goals are unmet, diagnose the are being met. Practices related to this step underlying reasons for such failures such that a focus on evaluating progress made by program of supplier development activities can suppliers with respect to sustainability targets. take place to support improved future performance. Put it into practice: Put it into practice: • Develop clear and structured action • Involve company staff in on-site training plans for non-compliant suppliers of suppliers • Use ‘probation periods’ in which • Hold supplier conferences to facilitate cross- suppliers can develop and implement supplier learning and knowledge sharing plans of action to address issues • Work with a reduced supplier base to • Use local community evaluators concentrate resources and attention to gather informal intelligence on on developing a few key suppliers conditions in suppliers’ plants • Foster and incent long-term relationships • Introduce supplier recognition and with suppliers through long-term contracting reward programs that highlight suppliers and price premiums achieving sustainability excellence • Invest in suppliers via equipment, working practices or loans for new equipment and technology IKEA employs a ‘Staircase Model’ which encourages continuous improvement from its suppliers by establishing four levels of progressive achievement. Also, IKEA audits are not just ‘box-ticking’ exercises. Each auditor must “check that procedures work in reality.” Auditors are required to “explain the IKEA philosophy and check that the supplier understands the key environmental impacts and has started to measure and follow up.” Source: Unchaining Value: Innovative approaches to sustainable supply. 2008. UN Environment Programme, http://www.unep.fr/scp/unchaining/publications/Unchaining-Value-Final-Report.pdf Managing Sustainable Global Supply Chains 14 4. Learn and Improve Develop an organizational capacity to Put it into practice: learn, and develop transparency and • Report supply chain compliance data, accountability in achievements and along with case studies of best practice performance. Evaluate company performance and examples of non-compliance to ‘close the loop’, feeding into revised • Establish an industry-leading position by expectations and management practices. hosting cross-industry problem-sharing Continually improve practices through workshops iterative communication and measurement. • Establish a company task force composed of in-house professionals and external academic and NGO expertise to review performance evidence quarterly to identify patterns and explore possible solutions Nestlé India’s supplier development department cuts costs by overcoming quality and food safety issues and creating a wider, more flexible supply base. It trains suppliers, provides technical assistance on safety and quality issues, and supports suppliers’ management systems and products. The company has saved over US$5 million in five years by developing over 70 new Indian suppliers who meet standards. The initiative has been so successful the company replicated it in Bangladesh, Brazil, Indonesia, Iran, Malaysia, Russia and South Africa. Source: UN Global Compact, Nestle: Creating Shared Value. http://supply-chain.unglobalcompact.org/site/article/64 Managing Sustainable Global Supply Chains 15 sustainable supply chains roadmap Step 1 Step 2 Step 3 Putting it into Practice: Motivations, Levers, and IDENTIFY ASSESS IMPROVE Practices Assessment MOTIVATORS LEVERS PRACTICES Why should you What levers will How can you put Use the three frameworks to care? What do you increase your chances assess your current strengths and it into practice? stand to gain of success? priority areas for improvement. and lose? STEP 1. Identify motivators. Underline the most important motivations for your company. motivators levers practices STEP 2. Evaluate levers. Underline the levers with Customers INTERNAL LEVERS EXTERNAL LEVERS Baseline practices the potential to facilitate • access 1. code of conduct your company’s supply Purpose: alignment of Peers: industry collaboration • attraction 2. supplier selection chain sustainability. Star sustainability with • reputation organizational strategy, history Partners: trust in supplier 3. certification those that you haven’t • brand engagement, dialogue with 4. monitoring/auditing yet taken advantage of. of CSR in the organization • retention suppliers, long-term Policy: clear policy relationships with suppliers, Best practices STEP 3. Assess practices. Compliance 5. environmental scanning Identify where your statements/codes of conduct, third-party certification, • regulation with stakeholders company is performing widely communicated shared vision with suppliers, • social pressure 6. develop KPIs through at a baseline or best policies, financial resources, experience sharing with consultation practice level. Highlight Costs training and workshops, suppliers, investment in incentives, transparent and suppliers, incentives in 7. supplier development priority practice areas • efficiency measured outcomes supply relationships, 8. data evaluation and learning in which you would like • productivity to improve, taking into • risk management collaboration with suppliers People: consideration your Public policy: supportive Competitive leadership/management current practices, key Advantage support, supportive regulation motivators and levers, organizational culture, change • competitive and the level and type agents, staff with strong Power: organizational size, advantage of resources you intend personal commitments power over suppliers to commit. Conscience and capabilities • moral obligation • values Managing Sustainable Global Supply Chains 16 Case Study from a Global Supply Chain Leader This case study uses the experience of “These benefits protect and enhance Unilever’s international food and consumer products reputation, help secure supply for our business company Unilever to show how incorporating over the long-term, provide increased stability the above practices into your supply chain of operations, and create cost efficiencies. yields benefits for the firm and its stakeholders. Ultimately, they generate competitive advantage,” notes John Coyne, Vice President, General SEEING THE BIG PICTURE Counsel, Unilever Canada Inc. Globally, Unilever earns annual revenues CREATING CONSISTENT EXPECTATIONS of over $50 billion from more than 400 brands. It sources from 10,000 raw materials To manage for sustainability in its supply suppliers and up to 100,000 non-production chain, Unilever developed a Supplier Code suppliers. In fact, Unilever purchases 12% which defines the company’s responsible of the world’s black teas, 6% of the world’s sourcing requirements. This Code is based on tomatoes, and 3% of the world’s palm oil. both local laws and internally accepted norms Securing supply is critical to sustaining and helps create consistent expectations across Unilever’s future business success and growth. the supplier network. Unilever requires not only that its direct suppliers adhere to the Unilever has discovered tangible business Code, but that direct suppliers ensure that benefits through supply chain responsibility – their suppliers also comply with the Code’s championing working conditions, providing principles. Says Coyne: “We’ve also discovered fair-wage incomes, and managing environmental that meeting code specifications today can be issues such as waste and climate change. less important than the supplier’s drive to exceed code expectations in the future.” Managing Sustainable Global Supply Chains 17 ENGAGING, CONSULTING AND SHARING, LEARNING AND IMPROVING COLLABORATING WITH OTHERS Unilever actively works to share knowledge Unilever requests supplier self-assessments and best practices amongst suppliers, peers and conducts site audits to ensure suppliers and partners. For example, through the are meeting the Code’s requirements. It Carbon Disclosure Project’s ‘Supply Chain asks suppliers to use the Supplier Ethical Leadership Collaboration’, Unilever and Data Exchange (SEDEX) platform, which its peers share their experiences and best offers standardized evaluation methods practices on how to engage suppliers in and makes audit data widely available. monitoring the causes of climate change This reduces duplication between buyers, in the supply chain. In addition, Unilever freeing up resources for supplier development shares its expertise with suppliers in areas and other improvements. It also reduces of expertise including irrigation management. suppliers’ administrative burden and helps As a result, water usage at farms in Brazil them build capabilities by learning directly has dropped 30%, while increasing tomato from others’ assessments. yields 20%. When audits reveal non-compliance, “Unilever’s approach to supply chain Unilever consults with its suppliers. In sustainability has been recognized one case, a major international sourcing internationally by the FTSE, Dow Jones partner was not meeting Unilever’s pollution and the World Wildlife Fund,” notes Coyne. standards. “By respectfully addressing this “Reductions in energy, water and packaging challenge with the supplier, we identified – consumption have generated cost savings and publicly disclosed – corrective actions,” on products, benefiting both our margins says Coyne. and consumers.” Managing Sustainable Global Supply Chains 18 About the Research This research was inspired by the NBS Sources of Knowledge Used in this Report Leadership Council, which gathers annually 2% 2% to identify the Priorities for Business 3% Sustainability. The research team, including 5% Dr. Stephen Brammer (University of Warwick), Dr. Stefan Hoejmose (University of Bath), and 29% 59% Dr. Andrew Millington (University of Bath), reviewed 194 relevant sources (see figure) over 25 years. Using this set of sources, the researchers conducted extensive, detailed analysis and synthesis of the materials to extract the various practices that support sustainable supply chain management. This review of previous research and practice reveals the following issues: • Research has focused mostly on social/ethical issues (44%), followed by environmental issues (21%) and the combination of both published academic paper business press/practitioner paper/article social and environmental issues (35%). conference proceedings/paper • The research is dominated by case-based consultancy/NGO report and anecdotal empirical analysis focusing newspaper/magazine article on problems and issues: there is a relative other document lack of theoretical contributions, suggesting this literature is still in its early stages. Read the full systematic review (www.nbs.net/knowledge/supply-chains) for a detailed discussion of practices, case studies, and implications for research and practice. Managing Sustainable Global Supply Chains 19 Funding for this research was provided by The Network gratefully acknowledges the the Purchasing Management Association of input of the following individuals into this Canada, Industry Canada, Suncor Energy, executive report: Sharon Ferriss (PMAC), and the Social Sciences and Humanities John Coyne (Unilever Canada), Heather Research Council of Canada. Mak, Karen Butterfield (Conference Board of Canada), Anabela Fonseca (Intertek), Georgina Wainwright-Kemdirim (Industry Canada), Robert Klassen (Richard Ivey School of Business), Larry Berglund, Erin Woodrow (Suncor), Maureen O’Higgins (BC Biomedical Labs). Note: This report is authored exclusively by Dr. Stephen Brammer, Dr. Stefan Hoejmose, Dr. Andrew Millington and the Network for Business Sustainability and does not necessarily reflect the views of the aforementioned individuals or their organizations. FEEDBACK Please let us know what you thought of this report. Contact the Network at firstname.lastname@example.org. Managing Sustainable Global Supply Chains 20 about the network A Canadian non-profit established in 2005, the NBS Knowledge Centre Network for Business Sustainability produces authoritative resources on important sustainability For additional resources visit the Network’s issues – with the goal of changing management Knowledge Centre at nbs.net/knowledge. practice. We unite thousands of researchers and professionals worldwide who believe passionately in research-based practice and practice-based research. The Network is funded by the Social Sciences and Humanities Research Council of Canada, the Richard Ivey School of Business (at The University of Western Ontario), the Unviersité du Québec à Montréal, and our Leadership Council. NBS Leadership Council The Network’s Leadership Council is a group of Canadian sustainability leaders from diverse sectors. At an annual meeting, these leaders identify their top priorities in business sustainability – the issues on which their organizations need authoritative answers and reliable insights. Their sustainability priorities inspired this research project. Managing Sustainable Global Supply Chains 21 Network for Business Sustainability Réseau entreprise et développement durable c/o Richard Ivey School of Business Département stratégie, responsabilité University of Western Ontario sociale et environnementale 1151 Richmond Street École des Sciences de la gestion London, Ontario, Canada N6A 3K7 Université du Québec à Montréal 519-661-2111, x88980 315, rue Ste-Catherine Est, Montréal, Québec, Canada H2X 3X2 514-987-3000, x7898 nbs.net
"Managing sustainable global supply chains"